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What Is an Employee Referral Program? HR Strategy Guide
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An employee referral program is any recruitment strategy a company may implement that encourages and incentivizes employees to promote open job positions to individuals within their personal and professional networks. The structure of employee referral programs can vary greatly and be influenced by factors such as industry, job function, seniority level, or budget.
When done well, employee referral programs can accelerate the recruitment process, reduce the time it takes to fill open positions and improve the quality and retention rate of new hires. Alternatively, if the program is not structured or executed well, it could create unintended consequences for the company.
Most HR leaders will find that their company can benefit from a referral program if it is thoughtfully and strategically implemented.
What Does It Mean to Be Referred to a Job?
A job referral occurs when an employee at your company directs a friend or acquaintance to apply for a position for which you are actively hiring. Typically, this will happen if that employee recognizes that there is a potential match between what your company is looking for, and the individual they are referring to the position.
For example, if your company is trying to hire new accountants, you may struggle with normal recruiting efforts. Yet you’ll need to hire for those roles as quickly as possible, particularly given the negative consequences that can occur when accountant roles remain unfilled for too long.
Employees who see this need may reach out to their network or encourage people they know individually and tell them to apply. Commonly, that employee will see some benefit in it (particularly if it’s a close friend or former co-worker they trust). Any individual who applies primarily because that existing employee at your company suggested it would then be considered an “employee referral.”
Many such referrals happen organically and without thought of incentives. However, your company can increase the frequency of these network-based recommendations by formalizing and incentivizing them through a company-sponsored referral program.
Why Should Companies Create Referral Programs?
Despite notable layoffs and headcount reductions, most companies across almost every industry struggle to fill open positions with qualified and exceptional candidates. Research firm Josh Bersin found that the time to fill open positions has increased. Many jobs stay vacant for 2 to 3 months. That can lead to a costly lack of productivity and leave existing employees feeling overworked.
Meanwhile, the cost of filling open positions has also increased. A joint study from Lightcast and Fiverr reports that unfilled positions cost companies an average of $25,000 per month in lost revenue.
Still, most companies need to hire the right people faster. In a survey on the topic, CareerBuilder found that 74% of HR leaders admitted to making bad hires, which cost an average of $15,000 for each bad hire they made.
The Benefits of Employee Referrals
There are several reasons why employee referrals are an ideal way to source applicants for open positions:
Lower recruitment costs
When employees refer individuals they know for open positions, it reduces the time recruiters must spend researching and locating applicants.
Faster time-to-fill
When employees send job referrals, they help increase the number of applicants for open positions, reducing how long it takes to fill those positions.
Better culture fit
Since employees are likely to refer friends or former colleagues to fill open positions, companies are more likely to find applicants who can easily adapt to their culture through pre-existing relationships.
Increased employee retention
Employees who are hired from a job referral tend to stay longer than other new hires, likely because they already have built-in networks and some familiarity with the company and its team.
According to Aptitude Research, 84% of organizations believe job referrals are the best way to reduce hiring costs.
When employees refer individuals within their friend, family, and professional networks, they’re doing so because these are people whom they trust and would like to work with professionally. Hiring from referrals ultimately leads to better employee engagement and retention for both the employee who did the referral and the potential new hire they referred.
Employee Referral Programs Have Possible Downsides
While there are clear and known benefits to hiring through employee referrals, HR leaders should be cautious about how they implement these programs. Employee referrals can produce some unintended consequences, including (but not limited to):
Perceptions of favoritism
Some employees may be skeptical of the people you are hiring through referrals and perceive those hires as a form of favoritism for the referring employee
Company culture
Your company culture may suffer if your referral hiring produces exclusionary cliques among employees
Reduced diversity
Hiring primarily from referrals could negatively impact your company’s existing diversity or its DEI goals
None of these potential consequences are a given. For example, many of your employees may have diverse social and professional networks, which could positively impact DEI and company culture. Nevertheless, your hiring team will still need to be just as cautious and considerate about who they are hiring as they normally are, even when the applicants are sourced through referrals.
How to Structure an Effective Employee Referral Program
After taking note of the risks and rewards of an employee referral program, you may find a strong desire or need to create one. Around 82% of companies use referrals in some form, according to Aptitude Research, which means your company won’t need to reinvent the wheel. Instead, you can borrow ideas from successful approaches.
Before you create an employee referral program, lay out all of the following information:
Clear Objectives and Goals
What are you trying to accomplish with an employee incentive program? What problem is it solving that can’t be solved through more common recruitment methods? For example, are you trying to fill positions that weren’t generating any quality candidates? Reduce your hiring costs? Increase diversity in different teams?
Eligibility Requirements
Who can submit referrals for open positions? For example, you may want to have a minimum tenure requirement on referrals or place limits on the nature of the relationship between the employee and who they’re referring to, such as no close family members (to avoid the perception of nepotism).
Reward Structure
How will employees be rewarded for referrals? You may decide to have a scaled reward structure, where referring employees are compensated different amounts based on how far their referred candidate gets in the hiring process. Or, you may only have an incentive if the referred employee gets hired and then stays for a set minimum amount of time (such as one year).
Your reward structure will also need to take into account what that incentive looks like. Will it be a bonus paid out upon hire? A gift certificate? Additional paid leave? The incentive should be something that will encourage participation from employees but also be functional with your budget.
Tracking and Communication
Your referral program should have a systematic way to record and track referrals. Quite often, this is done through the application form, with a field that asks if the applicant was referred by anyone. Nevertheless, hiring managers may want to have a system in place to verify that information with internal employees. If an applicant notes an employee as their referral, it’s a good idea to communicate that to the person who is listed as the referring party.
Evaluation Criteria
All referrals should be evaluated in the same way as any other applicant. If the individual being referred does not meet the job requirements, it may not be wise to move forward on that hire, but you should also be ready to have that conversation with the employee who referred that person to you.
Promotion and Engagement
Employee referral programs are only effective if employees know that the program exists. Before launching any employee referral program, create an internal marketing strategy and offer documentation that employees can independently access and reference. Some companies put referral programs in their employee handbooks, for example. It may be prudent to send personalized emails to specific departments or even specific employees who could have a positive impact on the referral program.
Legal Compliance Considerations
Referral programs may seem innocuous, but they could break existing employment laws. Have your legal team or a legal consultant assess your program criteria to ensure it doesn’t promote illegal hiring practices, such as age, race, or gender discrimination.
What to Do If Your Referral Program Isn’t Working
When done well, referral programs will generate more highly qualified job candidates who can integrate quickly and successfully into your organization. However, referral programs can also be highly unsuccessful, especially if the candidates you’re getting aren’t well-matched or if few employees are participating.
If your referral program is struggling, consider assessing some common reasons that these programs don’t work as intended:
Low employee job satisfaction
If your existing employees are dissatisfied at work, they aren’t likely to recommend open positions to others within their network. This situation may require you to put more effort and budget toward employee retention.
Poor internal marketing
If employees don’t know the program exists, they aren’t going to put in the effort to find and refer people to open positions. Make sure employees are well aware of the program and the incentives.
Poor incentives
If employees know the program exists but aren’t sending you many referrals, your incentives may not be persuasive enough. Consider increasing the budget or changing the incentive structure. However, don’t try to guess what incentive will work. Reach out to employees and ask what they’d like to see as an incentive.
The referral program is overly complicated
While it’s a good idea to have guardrails around your incentive program, you may dissuade participation if the program structure, rules, and guidelines are too complicated. Consider simplifying the referral program to make it a low-friction effort for employees.
The referral program is too broad
It’s possible that your program isn’t taking into account the differences in functions. If all functions and roles are treated the same and offer the same incentive, you may get very mixed results. Some roles, such as senior-level positions or those that are particularly difficult to fill, may need to have a different incentive structure.
Your Referral Program Is Only As Good as Your Hiring Practices
Referral programs will help fill your recruitment pipeline with more (and hopefully better) job candidates, but it’s no replacement for an ineffective hiring practice. Even as you build and launch your employment referral program, make sure that you’ve covered essential strategies that increase the number of high-quality candidates you hire:
Provide fair and equitable interviews
Make sure your interviewing process is conducted in a way that treats candidates fairly and with respect. The structured interview approach is a commonly accepted practice that involves having a standardized template for interviewing candidates that reduces bias and leads to a more consistent interviewing process.
Maintain adequate communication with candidates
Never leave candidates in the dark regarding their status. As candidates move through your hiring process, keep them updated on their status, next steps, and actions they should be taking at each part of the process.
Conduct better interviews
Interviewing is one of the most stressful parts of the hiring process for job candidates, even if an existing employee refers them. Conduct interviews in a way that reduces candidates’ stress and eliminates the perception of bias.
The better your hiring practices, the more likely you are to get a “yes” from higher-quality candidates. It’s important not to take it as a given that referrals will accept a job offer. Your company will still need to prove that it’s a worthwhile workplace.
Frequently Asked Questions
What is an employee referral?
An employee referral is a hiring recommendation for an open position that comes from an employee. It can take the form of an employee sending a job post to someone in their network, who then lists the employee as the referrer, or an employee recommending an individual who has already applied.
What is an example of an employee referral?
Here is an example of an employee job referral letter:
“Good afternoon,
I recently learned our company is hiring accountants. A former colleague of mine, John Grey, is currently in the market for a new accounting role. I worked with John for ten years in a previous organization, and he is not only a great fit for the job requirements but a great culture fit for the company. Here is his contact information…”
How do employee referrals work?
Employee referrals usually work in one of two ways:
- An employee sends a recommendation directly to the hiring team.
- An applicant lists an existing employee as a referrer when they submit the job application.
What is a typical employee referral bonus?
Employee referral bonuses often range from $1,000 to $2,500 but can come in any amount. The bonus amount may be higher or lower, depending on the available budget, the role that’s being filled, or the job level that’s being recruited.
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